JULY 13, 2020 JERNIGANGLOBAL.COM ISSUE NO. 1079 Global... · 2020. 7. 13. · JULY 13, 2020 JERNIGANGLOBAL.COM ISSUE NO. 1079 1 “T o say something is one-of-a-kind is to suggest

JULY 13, 2020 JERNIGANGLOBAL.COM ISSUE NO. 1079

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“To say something is one-of-a-kind is to suggest it has no equal. In the case of Supima®, this is especially true. Rare in every sense—less than one percent of the cotton annually produced in the world qualifies as Supima—this unique cotton has a luxurious look and feel that sets it apart. It is grown in a small microclimate of the southwestern United States and California’s San Joaquin Valley in particular, making it highly prized around the world. Such is our love for Supima that we have used it to craft many of our most enduring favorites—icons of fashion such as our Original Polo® Button-Down Oxford, our essential Performance Polo, incomparable non-iron shirts and women’s twin sets.” Brooks Brothers

A friend of cotton for 200 plus years was in trouble, and the call went out for help but no one came. This is a shocking and sad illustration of the lack of

GREEN SHOOTS EMERGE FROM EUROPE FOR APPAREL DEMAND

AFRICAN FRANC ZONE BASIS FALLS SHARPLY AS

PRESSURE BUILDS

INDIAN EXPORTS OFFERS DISCOUNT EXPAND

PHYSICAL COTTON DEMAND IN CHINA

REMAINS WEAK

A MAJOR FRIEND OF COTTON FILES FOR BANKRUPTCY – AFTER 202 YEARS BROOKS BROTHERS, A QUALITY ICON,

HEADS TO AUCTION


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consideration for the companies and people that built America. Brooks Brothers announced for bankruptcy on July 8, 2020, sharing the headlines with a new high in the NASDAQ stock index as shares of companies such as hybrid truck maker Nikola soared 34.3%. Where are the major US banks? They were busy helping Chinese CCP companies raise billions while leaving key American companies behind and helping propel the Hong Kong market higher. Something seemed very out of kilter in the universe as these events unfolded. US icon Brooks Brothers opened in 1818, the same year the White House opened after being burned in the War of 1812. The company has been a part of the US for over 200 years. For the cotton industry, it is the brand which made Supima an important part of the global luxury apparel market and made all cotton a staple of the US wardrobe. It was responsible for selling millions of Americans their cotton dress shirts for decades.

Forty US Presidents have worn their suits. President Lincoln was shot in a Brooks Brothers suit, President Kennedy wore them, and President Trump wore one to his inauguration. In 2001, Brooks Brothers was purchased by Italian fashion leader Claudio Del Vecchio, and the first thing he did was to refocus the brand on quality. It moved to focus all apparel on the finest wool, linen, and cotton, with the top Italian skills in quality. By 2003, the company was the global leader in quality. The motto was, “everything that surrounds the product has to be about quality.” It expanded outside the US and has stores around the world, in India, Japan, China, and other key markets. Japan, a market that knows quality, is its largest overseas market, opening in 1979, and was the first US apparel brand to open in Japan. Its Japan focus was on quality natural fibers, with its stores featuring tweed and corduroy. It has 81 locations. It moved into

China, expanding in 2016 with a joint venture with Lane Crawford Joyce Group that established stores in Hong Kong and expanded its Chinese network, as well as Macau, and Taiwan. In 2018, it celebrated its 200th anniversary with an opening of a landmark store in China.

Its dress shirts are legendary, with a selection of 1,000, each known for fit and quality. A famous customer was quoted in a 2018 New York Times feature, saying “I like the Supima cotton used and the way it rides on my neck.” It wanted its US stores to also offer a Made

Brooks Brothers,1850: Edwards, Elisha, Daniel, and John

Brooks Brothers College Collection

Brooks Brothers Classic shirt


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in the USA product. Unlike most brands or retailers that adopted an asset light model, Brooks Brothers had three made in their US factories. At Long Island City, it made ties with the label featuring an American Flag that read, “Brooks Brothers, proudly Made in New York, USA”. A Haverhill, Massachusetts factory made suits, coats, trousers, and uniforms. It made the uniforms for United Airlines. In 2019, the factory employed 550 people. Its Garland, North Carolina plant was the largest employer in that town and made the legendary Oxford shirt. The CEO/Owner Claudia was known for hiring English language tutors for the immigrant workers they hired and made Christmas visits to each plant with his wife to serve a meal and thank the workers.

Today, after the Wuhan virus added to the company woes, all the plants are closed, and the equipment is ready to ship to a buyer. The employees skilled in quality sewing and trained craftsmen are without a job, with no health care or severance. Where are all the politicians that are in the headlines to help the disadvantaged? Nowhere to be found. Where is the outcry about this American icon closing? Where are the lessons learned about the collapse first caused by NAFTA and then by China to all the small American towns and communities that were destroyed over the past 20 years? Where is the realization that these factories are a major asset to the US textile and apparel industry and the US cotton industry? It is beyond shocking that, while trillions of USD have been spent to aid citizens, workers, and companies to offset the

effects of the pandemic, nothing was put together to salvage and leave Brooks Brothers intact.

As 2020 began, an estimated 6.8% of Brooks Brothers products were made in USA according to an article in the fashion press. These products were made in a supply chain in which the workers were paid fairly, something which has moved to the forefront post-virus as the asset light model used by much of the supply chain left workers scrambling to be paid. The Made in the USA effort experienced a major setback with the closing of these factories and the lack of effort to save the workers. Brooks Brothers was the largest consumer of US Pima through their domestic mills.

Brooks Brothers, Australia

“Made in USA” craftsmanship gone


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The company’s website has an entire section devoted to the role its apparel has played in the life of many of its customers. The store predates the New York Times and Macy’s and is truly part of the American fabric. Yet despite the fact that this company, which produced a billion USD in revenue in 2019 and has over 500 stores around the world, found itself without government support when the Wuhan Virus destroyed US and global retail. We heard no discussion of providing aid to landmark retailers. Instead, millions of dollars went to others, such as law firms (really) and restaurants. One restaurant chain received aid of between $5 million and $10 million. However, the retailer to presidents was left out of the effort. This is a sad and embarrassing day for America and a day that will cost the cotton industry millions, if not more, as it tells the story of how the fascination of selling raw cotton to the State Reserve of China overshadows the attention to its retail customers and domestic industry.

Yes, Brooks Brothers was on the wrong side of the sudden shift to casual clothing and home offices, but with some time it would have transitioned well. The Wall Street crowd will say it’s all part of the move to the digital age. The bankruptcy will leave most

stores (51 have been announced as closing) operating for now, but we suspect the focus will end much differently. Brooks Brothers was about the experience of wearing excellent quality clothing made with care. The company’s in-house tailors made clothing fit and the customer feel like a king, and the skills were passed on for generations. Do you think they will survive the cost cutting that is coming? The focus on sustainability and the supply chain were legendary, as the company actually sent teams to visit US Pima cotton farms. The company was a friend of cotton and natural fibers and will never be the same again. Heavy cost cutting never made an experience better, only worse. Will a well-

Brooks Brothers, 1917

US President Lincoln & Brooks Brothers suits

US President Kennedy Brooks Brothers fit


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made US cotton shirt be offered over a lower quality blend made in the cheapest cut/sew location that provides a higher margin for the finance groups? It is quite unbelievable that a 200-year-old friend of cotton has drawn such little outrage. The experience of Cone Mills and its legendary White Oak mill tells us that buy-out groups and finance are no friend of cotton or the US textile and apparel industry.

Women’s Wear Daily stated the ownership of the firm will be determined at an auction managed by the court, and the effort lacked, “a stalking horse bid.” Two brand management firms have shown interest. The question of who will operate the firm is unknown. The non-US stores were reported to not be part of the bankruptcy. What we do know is that an important part of history is gone, the oldest US retailer found few supporters when it needed them, no discussion was given to its importance to the US cotton industry, its role in Made in America got hardly a mention in the press, and a great testimony to cotton, natural fibers and quality is lost. A friend of the global cotton industry has passed.

Brooks Brothers Supima ad campaign, NYC

Claudio Del Vecchio, CEO/Owner, Brooks Brothers

Brooks Brothers, Japan

Brook Brothers “We Love Supima” ads


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As Valentino and others seek to close their New York flagship stores, Paris is welcoming new ones. Cushman & Wakefield has called the Rue Saint Honor the hottest shopping street in Paris for luxury shoppers. It is called one of the most luxurious and fashionable streets in the world due to the presence of virtually every major global fashion house, the official residence of the President, Élysée Palace, the Hôtel de Pontalba, residence of the United States Ambassador to France, the Embassy of Canada, the Embassy of the United Kingdom, and world famous art galleries. On July 4th, America’s Independence Day holiday, Dior, global luxury brand Dior opened its flagship store with an interior garden, vintage furniture, and great views. The store is bringing even more grandeur to the famous street. This opening is coming as European retailers and brands begin to report improved retail sales, and, in apparel, begin to provide the first major green shoots for the global textile and apparel chain. As the European stores and brands begin to have the confidence to place some new orders, it appears very quiet from the US and Americas.

New York City and Paris have for the last ten years competed aggressively for the title of the World’s Fashion Capital, with New York winning in the last contest. However, New York’s role as the Global Fashion Center is ending, and the baton is likely to pass back to Paris where it will stay for now. New York suffered significant economic damage from the Wuhan Virus, and it has yet to recover, with new lockdowns again being announced. The pandemic has been grossly mismanaged by the city’s mayor, and, so far, calls for his removal have gone unheeded by the New York governor. The greatest impact has come

from the mayor’s socialist agenda and the complete breakdown of law and order. While protests and looting have occurred on a massive scale, indoor dining at restaurants remains closed, as have Broadway, sporting events, and concerts. Then came the mayor’s disbanding of the elite anti-crime unit and reduced funding for the police. This has caused a breakdown of law and order, with shooting up 205% in the June 15th–July 2nd period and injuries up 238%. In the 24-hour period ending July 5th, 44 people were shot, four stabbed, three are dead, and two police officers were shot while setting in their car.

The economic collapse this is causing is outrageous. The closed restaurants face record closures, which mean no payment of rents, which has a lead-on affect. The law and order aspect is causing the retail sector to face new worries as they attempt to reopen and as foot traffic in many areas is reported to be almost nonexistent. As we discussed previously, those that can move from the city appear to be exiting at a record pace. The impact on the luxury apparel in the US is massive, and it seems no city so far is the natural beneficiary. Chicago has been just as mismanaged and is going through a similar crime wave, which has halted tourism and is also resulting in an exodus. Atlanta has experienced a crime wave and violence. On the West Coast, the trouble continues in Washington state and California. California is again impacted by the actions of its governor, who is stifling any economic green shoots and creating an exodus out of Los Angeles and San Francisco to the suburbs and other states. San Francisco is headed toward a crisis. Renters and homeowners are fleeing what was the most expensive city in the US. It has a sizeable homeless problem, which has destroyed the once pristine city, with tent cities and crime and drugs now a serious problem. Mismanagement by the local mayor is collapsing the economy. Just last week it put the reopening of restaurants and bars on indefinite hold. This means these areas will not take up the Fashion Capital status. In California, a new government policy will dramatically impact the large apparel industry in the state. The Garment Worker Protection Act is pending in the California Senate. If passed, the bill will provide a minimum wage for apparel workers, replacing the piece rate in which garment workers can earn large bonuses for production in a single shift. The bill will end the bonus program that made the job attractive for the top workers.

Against this backdrop, Paris and France appear set

PARIS SET TO TAKE THE TITLE OF WORLD FASHION CAPITAL AND TURKISH EXPORTERS SET TO BENEFIT


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to dominate the world’s luxury goods and apparel market for the remainder of 2020 and 2021 at least. France already owns many of the top brands, LVMH, which operates across the US has an estimated 24.7% of the total global luxury market. In addition, one impact of the pandemic is that these luxury brands are reducing their partner networks and moving even more heavily to a direct to consumer model, which will have an impact on Europe as well as the US. The French luxury market is estimated at 16.475 billion USD

in 2020, with apparel accounting for 5.95 billion of that. In the latest data, France imported approximately 31.8 billion USD worth of textiles and apparel in 2018. Of that, China was the top supplier at eight billion, followed by Bangladesh, Italy, and Turkey. Turkey has gained market share and is now benefiting from the improvement in orders from France.

Overall, France remains an important part of the EU textile and apparel industry, with fashion within the country estimated to have an impact of 2.7% of the total GDP. Luxury goods production in high-end items, such as linen, remain a driver. The epidemic which closed borders was a boost for the industry, as the country’s textile industry created a supply chain for production of Personal Protective Equipment (PPE) from scratch. The effort has led to the French government launching a task force to help the industry relocate businesses back to France. The French labor and Social Security costs are some of the highest in the world, which means any relocation will be difficult. Its products, such as PPE, are deemed a security issue. Additional green shoots appeared at the end of last week. Italian Industrial Production was much stronger than expected, growing 42.1% from April. In France, industrial production in May grew 19.16% from April, and retail sales grew 25.6%.

The growth expected from France and other European retail centers is limited by the lack of tourist traffic. When the EU reopened travel, it banned tourists from the US, Japan, Thailand, South Korea, and China, all major luxury spenders. The Chinese luxury buyer is now trapped at home. Bloomberg estimates that this group will spend 111 billion USD in 2020 on luxury goods. Bain and Company reports that, prior to the pandemic, 66% of all Chinese luxury purchases were made outside of China. The halt in travel has changed everything. The popular reseller Daigou’s practice has changed. Chinese students and travelers abroad would purchase from luxury boutiques in the US and Europe and bring the goods home to resale. The resellers are now stuck back home or stranded abroad, which has had a major impact on the selection of goods in Chinese stores. Surveys show Chinese travelers feel unsafe abroad. The demand has refocused on domestic stores and outlets. Boston Consulting estimates that the spending will still expand in 2020, while the rest of the world contracts.

The research suggests travel is not expected to return to the Chinese spender’s agenda for a while. McKinsey says Chinese shoppers are not currently considering a trip outside of China, and when they do travel, they will focus on trips within China. China is pushing Hainan’s free trade zone as a destination for shoppers. On July

Dior’s new flagship store, Paris

Rue Saint Honor, luxury street of the world

Rue Saint Honor, Paris


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1st, it raised the tax-free spending limit to 100,000 RMB a year from 30,000 RMB, and spending was reported to have surged. Many luxury brands are increasing inventories in China and also setting up virtual shops on the Alibaba TMall. A survey by Global Blue showed that Asian travelers viewed Germany as the safest travel destination in Europe, which has led some to refocus on increasing the offering at the Munich luxury stores. Germany is not typically a major luxury market, with its consumers more focused on price. H & M has been the leading retailer there. Another survey, which showed Chinese shoppers preferred these cities when they do decide to travel again, does offer hope for France and Italy. Norway is also getting attention, with some focus on luxury in Oslo. Norway has managed the virus well, and its economy is recovering rapidly.

Since the virus, there seems to me more of a sourcing

focus on Turkey, Morocco, and EU suppliers away from China. The move from China was already underway before the epidemic. These improved export prospects and a resilient Turkish domestic economy are making Turkey one of the first green shoots to emerge from the Wuhan Virus crisis. Most Turkish cotton spinning operations are now operating near 70%-75% of capacity, which is one of the highest levels in the world and indicates 2020/2021 cotton use will exceed earlier fears, making this one of the bright spots for exporters. In addition, Turkish growers have reduced the acreage planted to cotton, with the 2020/2021 crop not likely to exceed three million bales. This set the stage for a repeat of very brisk import levels in 2020/2021. Pakistan exporters have also reported an increase in new orders from Europe, which has helped some operations to recover back to near 40%-50% of pre-virus levels.

The recent old crop selling tenders from the African Franc Zone origins to merchants has resulted in a significant fall in the AFZ CFR Asia basis last week, which was expected for some time. It also suggests that the selling organizations are the entities that have long been the basis, holding over three million bales of unsold 2019/2020 crop inventory. The exact volume sold at tenders the previous week is not known, but it has broken the merchant basis, as these stocks begin to move into commercial hands. Overall, merchant demand was poor at the tenders, and the selling organizations face problems moving their stocks. The inability to use ICE futures as an effective hedge has

made managing a long basis position very difficult. The average CFR basis has fallen 450-500 points, which is dramatic, but for months merchants have been holding CFR basis levels unchanged, as the CFR levels for Indian, Brazilian, East African, Argentine, and others collapsed. African Franc Zone offers had been the most expensive in the world and were not reflecting post-virus demand and the artificial up move in ICE Futures. The gains in ICE futures last week added to the basis pressure, as it also did to Indian, Brazilian, and even US basis levels.

The high-quality Cameroon Plebe 1 5/32 offers now stand at approximately 1000 points on Dec, which is down 450-500 points. It remains at a 1400 point + premium to an Indian Shankar-6 1 1/8, but at a 500-point discount to a US E/MOT 31-3-37 GC. The standard AFZ Strict Middling 1 1/8 offer is now at 800-900 points on Dec, depending on origin. This reflects a decline of 500-650 points from recent offering levels and places it at a 450-550-point discount to a US E/MOT SM 1 1/8 offer but a 1450-point premium to Indian S-6 1 1/8. Even more aggressive offers and sales of West African low-grade recaps have appeared and sold at CFR levels off ICE. We continue to expect pressure on the CFR basis for these styles until ICE futures return to reality.

AFRICAN FRANC ZONE CFR 2019/2020 CROP BASIS COMES UNDER MAJOR PRESSURE


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A sizeable Chinese-based buyer of Australian cotton in recent years halted operations, and forward purchases will not be honored. A block of both 2020 and 2021 crop is believed to have been affected. In recent years, it has become common practice for merchandising groups to aggressively compete for the crop, providing bids at times that were not reflective of demand at the mills level. Also, the practice of shipping unsold bales to the bonded warehouses over the past

two seasons has proven less lucrative, as demand in China has declined. Australian cotton is very popular with Chinese spinners. However, mill use is now 50% or less below capacity, and demand for the 50s and above count yarns is very weak.

Australian export shipments in May fell to only 8,759 tons, with 4,098 tons moving to China. Total August-May shipments total 256,653 tons, with 159,541 tons moving to China, while shipments to Vietnam fell to 24,076 tons. The harvest in Western Australia is complete, and the seed cotton is being shipped to Queensland for ginning and export. The ORD regions need a gin, and when that occurs the cotton can become much more profitable to grow in the west and then export out of Darwin, which is a very short shipping time to Indonesia. The Western Australian crop could, in the future, fill demand in Indonesia with the just-in-time delivery feature and with much lower shipping cost. A light weather system moved into much of the New South Wales cotton belt on Friday and brought a chance of rain which will continue through July 13th. Amounts from 10-25 mm are forecast. The southeastern Queensland belt will experience the same system. The cotton belt needs significant rainfall to boost water

Cotton in the Ord Valley

AUSTRALIAN GROWERS HAVE TO DEAL WITH DEFAULT OF CHINESE BUYER

G I V E - B A CK

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A RESPONSIBLE CHOICE FOR BRANDS, RETAILERS & MANUFACTURERS

Making farmers lives better with a more equitable supply chain

WHY COTTON? Comes from Nature, Returns to Nature


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levels.

The local FOB basis has fallen. As ICE rallied, the 2020 crop basis fell to 650 points on Dec. The 2021 FOB basis is at 875 points on May 2021 futures, a 75-point lower basis than was prevailing. This kept cash prices

paid to growers unchanged during the ICE rally last week. The 2021 Australian CFR basis has remained at 1900-2000 points on May 2021 for a SM 1 5/32 and 2000-2100 points on for a SM 1 3/16. These are at a 500-point or more premium to US Green Card offers for the same grade.

As we discussed in detail last week, all export trade except for specialty discounted lots have switched to non-US growths, with the China Reserve the only recent buyer of US styles at the inflated price level. In the week ending July 2nd, net 2019/2020 export sales of US styles totaled 43,800 running bales of upland, with 22,000 bales moving to China and 2,800 bales of Pima sold and with 1,300 bales sold to China. New crop 2020/2021 sales totaled 6,700 bales of upland and 3,600 bales of Pima. The only bright spot was US export shipments, which reached 329,300 running bales of upland and 7,300 running bales of Pima. This was

at the level needed to meet and possibly exceed the USDA export target and included 112,400 running bales of upland to China.

US outstanding export sales to China remains a major liability for the US, since for 2019/2020 the US has 19,300 running bales of Pima and 1,567,400 running bales of upland sold and not shipped. 4.14 weeks remain in the 2019/2020 season, which means Chinese carryover sales of at least a million bales are likely. For 2020/2021, outstanding sales stand at 1,300 running bales of upland and 1,213,400 running bales of upland.

Indian exports of cotton continue to struggle to gain momentum despite record discounts to many growths. March export shipments totaled 61,037 tons, or about half the level of a year ago. Bangladesh remains the main export market, while shipments to Pakistan remain halted, and Chinese mills are now boycotting Indian styles. August-March export shipments reach 519,889 tons, with 324,845 tons moving to Bangladesh. Shipments to China were already down over 50% before the border war at only

107,211 tons. Vietnam remains a much-reduced market. However, increased sales to Indonesia and Turkey have been noted. March cotton imports reached 19,049 tons. Cotton yarn exports in March fell to 73,359 tons. A sharp decline since then in shipments to China means Bangladesh will be the top yarn export market as well. The crop is rapidly being planted amid an active monsoon, reaching 9,167,200 hectares by July 2nd. In Gujarat, planting has slowed, reaching 1,825,276 hectares according to state’s estimate, which is 2.7% below the previous year, while groundnut planting is up 18%. The premium of the MSP to the physical price level has meant that all non CCI cash prices were far below the MSP. This has made farmers consider other crops such as groundnut in Gujarat, which has seen local prices exceed the MSP level. Local Indian estimates continue to suggest the USDA has overestimated Indian stocks by a sizeable margin. The Cotton Association of India has officially appealed to the USDA to address the issue and also has asked the government to get involved. The mass Indian network of mills and farms makes any stock estimate difficult. However, the USDA for years has

US NEW CROP EXPORTS HALTED AS CFR BASIS LEVELS & ICE PRICE LEVELS HALT SALES

INDIAN EXPORTS CONTINUE TO DISAPPOINT WHILE CFR OFFERS REMAIN CHEAPEST IN WORLD


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used a calculation that has made all Indian estimates experience great volatility from month to month, which we have pointed out several times and also to the over estimation of stocks.

The local spot market is weak, which is keeping export CFR prices under pressure even with a rally in ICE. Thus, judging Indian export offering prices on a CFR level on or off ICE is difficult. CFR basis last week extended their discount, on July 9th. The CFR basis for an Indian S-6 1 5/32 was offered at 550-575 off Dec ICE, while a S-6 1 1/8 was offered at 600-625 off Dec. These levels are much cheaper than the levels carried by the international merchants. International merchants do not appear to be building any inventory of Indian styles and are only carrying token S-6 offers. This may explain the discrepancy between the offering levels included in the A Index and the delayed inclusion of Indian in the Forward A. This only occurred on July 10. This is a weakness in the index that needs to be corrected given the role Indian styles are going to have in the 2020/2021 season. Even when adjusted from the USDA’s inflated levels, a successful 2020/2021 domestic crop will exert major influence on India to be a major international exporter of cotton, unless domestic consumption exceeds all expectations by a wide margin.

Adding to the problems with Indian exports is the inability to sell into Pakistan. Pakistan is currently taking up a large volume of lower grade international

growths and allowing Argentina, East Africa, and Brazil to move volumes to export. Now, Chinese spinners appear to be boycotting Indian styles, and the record low CFR basis level has not drawn even these mills back in. On July 8th, Chinese spinners took up all the cotton offered at the Reserve auction, and the average price was 11,567 RMB a ton or 74.98 US cents. On the same day, Indian RG 73 1 /8 could have been purchased landed the port at 67 cents after VAT and 1% duty under the WTO import quotas. The discount of 8 cents is not yet irresistible, and we do not know what the unspoken instructions are regarding Indian purchases.

As expected, the USDA, in its July WASDE estimates, lowered US production, which was not based on a yield survey but a reaction to the June planted acreage report and current weather impact estimates. Harvested acreage was placed at 10.25 million acres, which was only a 15.914% abandonment. Average yield was depressed by the higher harvested acreage at 820 pounds, providing a crop of 17.5 million bales. The USDA stated that this was based on a 10-year average yield by region. While the production estimate was above our own estimates, we continue to expect lower harvested average and higher average yields. The USDA lowered 2019/2020 carryover by 200,000 bales to 7.1 million as a result of increasing the final 2019/2020 exports to 15.2 million. 2020/2021 exports were lowered by a million bales to 15.0 million bales. This number is 1.0 to 1.5 million bales above our own work,

which we discussed in detail last week, and will require a very large Chinese purchase. US ending stocks were estimated at 6.80 million bales. In the world estimates, the most notable changes were in the trade mix and flows. For 2019/2020, Pakistan imports were raised 300,000 bales to 3.6 billion bales, Turkey imports were raised 300,000 to 4.3 million, China imports were lowered 250,000 to 7.250 million, Bangladesh imports increased 200,000 bales to 6.20 million bales, and Indian imports increased 200,000 bales to 2.4 million bales. For 2020/2021, Pakistan imports were reduced 600,000 bales to 3.9 million bales, Mexico imports reduced 250,000 bales to 650,000, and Turkey imports reduced 100,000 bales to 4.1 million bales.

USDA WASDE LOWERS US CROP AND EXPORTS


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Last week, cotton traders in China attempted to hold back physical sales offers with the hopes that ZCE futures would be able to rally. The lead September contract ended the week at 12,110 RMB a ton. This was a gain of 175 RMB, about 1.14 cents a lb. for the week. The gains came from speculative buying and a hesitation by the Trade to sell ZCE futures. China’s domestic market last week was a hot bed for speculators, as everyone attempted to play the Chinese stock markets, which posted strong gains following a push by the state media and actual buying by the state funds. This fever created some buying in cotton futures. Overall, ZCE futures for some time have been trading near the China Cotton Cash Index and had no real premium built in, which has provided support on price dips. The second supportive feature is the State Reserve auction, which established a price floor at 11,500 RMB. The cotton trading at the Reserve auctions has been above this price, but, when adjusted for standard quality differentials, the futures have been at a discount. The Base price will increase this week.

However, the market has lacked any really Trade

support, because physical cotton demand is quite soft. Spinners continue to operate at low capacity, and downstream the operating rate at the fabric mills has actually weakened over the last two weeks, falling below 50%. Demand is simply weak. Last week, this caused spinners, despite the gains in the ZCE, to reduce yarn prices, especially for 40s and above counts in order to stimulate offtake where they could. Moreover, traders earlier reentered the global yarn markets and increased purchases that are now arriving in June and July at the port. One estimate has June cotton yarn imports moving back above 150,000 tons. These arrivals have made cotton yarn imported stocks very burdensome, with some increased shipments from India, Pakistan, and Uzbekistan now offered aggressively in the market. These stocks will hurt yarn prices all summer if demand does not improve.

Polyester prices are also at new lows, as producers attempt to find demand with fabric mills since the rally created by PPE is over. Some polyester production units have restarted operations, which is causing stocks to accumulate.

The scenario we feared happened last week. ICE futures experienced an upside breakout and carried upward to the 65 area before the first resistance appeared. Meanwhile, the physical cotton price was lower, and CFR Asia basis collapsed in several growths and moved lower in all growths. For the hundred-year-old plus futures contract, we have to go all the way back to the pre-marketing loan days in the US to find a time when the New York futures contract did not work as an international hedging tool. In that instance, it was a USDA cotton program that caused the problem, which was corrected by President Reagan. This time it is an unresponsive ICE exchange and a failure by the industry to hold ICE accountable that is creating the drama. Of course, the crisis has been caused by the US/China trade arrangement, which distorted markets. We saw this problem developing in May and have been very bearish on the CFR basis. Today the international cotton trade has a crisis. The crisis is the Trade over the last two weeks has become increasingly hesitant to add any non-US bales to their long basis position. The reason is the risk a long, non-US basis position carries when you cannot hedge on ICE. The ability of the Trade to use ICE futures to hedge non-US growths

has been a major component of brisk world trade in recent years, with the Trade willing to carry large basis long positions at times relieving the burden of growers and selling organizations around the world. This has provided a valuable service for selling organizations that need the cash flow of sales to facilitate the next crop and maintain cash flow. Since May, the trade has seen the CFR basis level for most non-US growths drop 500-1000 points and sometimes more. At the same time, any hedge in ICE futures would have added 400-500 points or more to that loss instead of offsetting a portion of that loss. We have pointed out how the delivery mechanism on ICE kept the true weight of US stocks from ever being reflected and allowed easily for squeezes. The ICE and the Trade made no plans as how to manage a US/China trade agreement if it was actually fulfilled. This is something we still doubt, but, for cotton, the purchases have been made but have not yet shipped.

The CFR basis for African Franc Zone styles collapsed last week, as we discussed earlier and have expected for some time. The 500-plus point decline has only made the lowest grade competitive, and some further

PHYSICAL COTTON DEMAND IN CHINA SOFT EXCEPT FOR RESERVE SALES

ICE FUTURES MOVE HIGHER AS CFR BASIS FALLS SHARPLY


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discounting has caused a bit of Bangladesh offtake, but Brazilian cotton is still at a major discount and will take most business. The Brazilian basis was weaker last week, with the greatest weakness in the special discounts that merchants offered in a few markets to secure the offtake. New crop offers are aggressive, as harvest advances. East African basis levels are extremely weak, as sellers need to move some stocks and the Trade will not add to longs, thus leaving sellers attempting to find a spinner. Indian CFR basis levels out of Indian shippers moved to a new low and still little offtake outside Bangladesh.

We continue bearish on physical non-US price levels and CFR basis levels unless ICE returns to its role as a price discovery mechanism. For now, US/China trade relations could not appear more tenuous, but the purchases of US agriculture products continued in the last week of reporting. Will they continue and will shipments be honored? That remains a great unknown. As we end the week, a top Hong Kong scientist who escaped to the US gave a news interview regarding the Wuhan Virus. It is rumored to have drawn a hostile Chinese reaction, including death threats. President Trump is expected to sign the Hong Kong Autonomy Act this week, which will target all mainland and Hong Kong people and companies who have supported and implemented the Hong Kong security law. Significant sanctions and asset seizures are required, which created a review of clients by all banks in Hong Kong, including the US banks that have been playing a large role in financing the CCP companies and the Hong Kong companies that are involved. The US has

sanctioned four top Chinese CCP officials over their role in the Xinjiang concentration camps. The US earlier sent two aircraft carriers into the South China Sea for the first time in six years and will make a major announcement regarding the South China Sea and China’s violations this week. A new bill is working its way through the Senate that will ban Chinese state-owned companies from US capital markets. A Treasury official leaked that the US is considering ending the Hong Kong /USD peg. President Trump said there will be no Phase 2 trade deal on Friday. We certainly do not know the answer, but these conditions do not suggest that the trade agreement will hold and be the rescue package US cotton exports need.

While green shoots are occurring, in Europe the US retail sector is in trouble. The Wuhan Virus is in a second wave, with record US cases on Thursday and the powerhouse states of Texas, Arizona, California, and Florida seeing an increase. The home goods sector was hard hit last week. Sur La Table declared bankruptcy, Japanese retailer Muji announced that it entered bankruptcy, and Bed Bath and Beyond announced it was closing 200 stores. Ascena Retail, which has almost 3,000 stores, including major women’s apparel names, is expected to file any day. It just keeps going on. A Morgan Stanly survey showed 75% of all US shoppers surveyed are avoiding malls. The problem with cotton inventories remains at the forefront, and the price pressure is being accelerated in its impact by the ineffective ICE futures. A convergence of futures and physical prices would provide the first development to return some stability. For ICE, the market is now in its greatest control ever by the HFT/Algo systems and Managed Funds. The Trade is reduced to hedging the US book, and US growers have shown very limited selling interest below 65 cents. The COT report showed that through July 7 the trade sold 15,373 contracts or 1,537,300 bales during that week. The Trade Net Short position is now at its largest level in months at 78,294 contracts net short. As expected, the managed funds increased their longs along with the Index Funds. The Managed Funds were net long 21,520 contracts as of Tuesday and are now likely near 25,000, the first benchmark for a position. We had expected at least this position. What is unknown is whether this will be expanded to 50-75K, which is not an impossibility. For now, ICE remains in one world and Physical cotton prices outside the US in another.


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JULY 13, 2020 JERNIGANGLOBAL.COM ISSUE NO. 1079 Global... · 2020. 7. 13. · JULY 13, 2020 JERNIGANGLOBAL.COM ISSUE NO. 1079 1 “T o say something is one-of-a-kind is to suggest